The importance of managing reputational risks.

Reputation is a value driver through the favorable behaviors that generates in the stakeholders and affects the income of organizations, which is of paramount importance in their management.

In a previous article on trends in corporate reputation I mentioned that the management of intangible assets is increasingly present in the roadmaps of organizations. We live in a society where we not only must be good but also seem so, as to generate a good reputation is necessary to be consistent between what we say and what we actually do, a fact that is as true for companies and organizations as for individuals.

According to the interesting study The Impact of Reputation on Market Value made in 2012 by the founder of Reputation Dividend, Simon Cole, the contribution of the reputation in the value of market capitalization of a company is, on average, more than 25% of its value. Although that contribution varies according to the size of the company and is normally higher as the company is bigger, something that should not be surprising because the bigger they are the best-known organizations are, and is also easier to have a valuation of them.

If the mere fact of capitalization was not serious enough to manage the reputation, it gives the company several advantages, eg higher direct sales, new sales by recommendations of others, achieving and maintaining a license to operate, or a greater attraction and retention of talent.

Therefore, corporate reputation is an asset that must be defended at all costs, increased as much as possible and be treated by all means not to lose to a lesser or greater extent, avoiding reputational damage.

According to the Aon Global Risk Management Survey 2009, the reputational damagewas on the 6th position in the Top 10 on urgent business risks, while in 2011 climbed to the 4th position. In 2014, according to Deloitte’s Global Survey of executives on strategic risks, reputational damage had moved to the No. 1 position of the concerns of managers, without leaving any kind of doubts about its importance.

How can we avoid or minimize the reputational damage?

Although it also depends on other variables, we will refer to two main factors to avoid (or minimize cases where the damage is made) such damage: the knowledge and management of reputational risks that the organization faces and the right approachto crisis resolution.

We can say that a reputational risk is created when an organization is performing below the expectations of society. Similarly, if the performance is above expectations we can speak of a repetitional opportunity.

Generically, the main types of reputational risks that a company can face are four:

- Natural: are determined by the natural environment with a low capacity to be predicted in advance.

- Environmental: Caused by legislation or regulatory changes affecting a particular sector.

- Operational: Those existing inherent risks in the production processes of the business.

- Leadership related: They will depend on the overall management of the organization in the exercise of its power.

It is vital to conduct a thorough analysis of all subtypes of specific risks within the above that our company may have. First, through a weighting to order them by importance according to the probability of occurrence and degree of seriousness of the risk, and then making a specific plan so we can minimize their occurrence within the possible and defining specific indicators that are monitored and discussed periodically by the board.

According to Deloitte’s study, the main vectors of reputational risk for executives today are: ethics / integrity (fraud, corruption, theft), products / services (security problems with products and services, problems with health and environment), security (physical and cyber) and financial (reporting, accounting issues and credit rating).

In general, companies are better in managing risk in areas where they have direct control, such as compliance with laws and regulations, or misconducts by employees or management. Meanwhile, companies have more difficulties in areas that do not have under control as those concerning ethical behavior of third parties, competition attacks, or environmental problems or disasters.

It is also interesting to note that customers are the main stakeholder in managing reputational risk, while other stakeholders and regulators, senior executives, employees and investors also play an important role. But it is in this society of immediacy and 2.0 governed by the “social media” where it is essential to properly manage the requirements and expectations of customers if we want to minimize the increased risks.

Regarding to who should be responsible of managing reputational risks, this would be a task, in order of priority, of CEOs and Risk Management Directors first, followed by the Board of Directors or CFOs .

The approach in solving reputational crisis will be very important so they have the least serious consequences. Instead of having a reactive approach, a proactive one is needed. A company that has “done its homework” and has followed the recommendations above will use a proactive approach based on the anticipation of risks, analyzing the probability of success, managing the expectations of stakeholders, designing a crisis manual, and monitoring and evaluating the situation, and managing the subsequent the reputational damage caused. As advantages, this approach allows, among other things, managing “in positive”, clearly identifying the stakeholders involved and the degree of involvement, providing information faster and with greater clarity, and reducing and repairing damage from confidence.

From the perspective of this proactive approach, the proper crisis management will have 4 main keys to its success:

- The company must have activated the incident command, monitoring and early warning systems.

- The organization must understand the environment and keep abreast of the risks and possible solutions.

- The corporate culture of the company has to adjust to the demands of crisis management.

- Managers and executives must be trained and know the procedures and their proper application.

By contrast, using a reactive approach, the organization can not anticipate the crisis, will lose the initiative and go “in tow” of events, it will not provide the correct and quantitative information that stakeholders require, the communication will be delayed and therefore will be less credible, and this will lead to a much slower solution of the repetitional damage.

Last but not least, we must not fail to remember that a company that has a solid reputation achieved with the passage of time will be more resistant to damage and reputational crisis than one that does has not.

After everything said, it is clear the transcendence of the proper management of reputational risks in the operation of organizations today, a significance that will certainly be bigger in the near future.

Note: This article was first published in spanish and can be found here.